An Inclusive Growth Dividend: Reframing the Role of Income Transfers in India’s Anti -Poverty Strategy Maitreesh Ghatak, LSE Karthik Muralidharan, UC San Diego India Policy Forum, New Delhi, 9 July 2019
Background There has been a surge in academic and policy interest in the idea of a • Universal Basic Income (UBI) as a tool for poverty alleviation Kapur et al (2008); Bardhan (2011); Joshi (2016); Banerjee (2016); Ghatak (2016); • Davala et al (2015); Mundle (2016) and several others True in both high and low income countries • Given policy salience in India by 2016-17 Economic Survey • Move to income transfers for anti-poverty programs in India has taken on • serious momentum in the past 18 months – especially for farmer welfare Rythu Bandhu Scheme, KALIA, and especially PM-KISAN (0.5% of GDP) • Move to cash transfers/UBI has also been criticized • Roy (2019); Aiyar (2019) • Dreze (2016) • 1
Goals for this Paper Review theory and evidence on income transfers as tool not just for • poverty alleviation, but also for increasing productivity Inform policy debate on income transfers with recent field experiences of • actually implementing income transfer programs in India Use the policy momentum created by PM-KISAN to examine questions of • optimal design (targeting, amount, supplementation vs. substitution, placing income transfers in a portfolio of policies) Present a specific policy suggestion: an “Inclusive Growth Dividend” (IGD) • Fiscally and politically feasible to implement over the next 1-2 years • Can deliver most of the benefits of UBI, while also mitigating concerns • Can increase productivity, and quality of other public expenditure by enabling choice • and making income transfers a benchmark for government-provided programs 2
Outline of the Talk Discuss key conceptual issues (theory and evidence) regarding • the design, scope, and likely impact of universal income transfers Present details of our specific proposal on an Inclusive Growth • Dividend (IGD) and discuss its benefits Discuss an implementation roadmap for Centre/States to • pilot/implement and evaluate an IGD 3
Key conceptual issues 1. Income transfers versus direct provision of goods and services 2. Substitution versus supplementation 3. Targeted versus Universal Income Transfer Programs 4. Will people spend cash transfers badly? 5. Effect on work incentives 6. Female Empowerment and Improved intra-household targeting 7. Relaxing Borrowing Constraints 8. Mitigating Risk 9. Alleviating Savings constraints 4
1. Income transfers vs direct provision of goods and services (I) Critics argue that income transfers: • a) Crowd out spending on important public items, such as health or education (Aiyar; Roy 2019) b) Represent giving up on the idea of a “developmental state” and moving towards a “compensatory state,” equivalent to an abdication of core state responsibilities (Roy 2019) How should we assess this concern: Key consideration is • a) Expenditure on public goods versus redistribution (publicly-provided private goods) b) Quality and effectiveness of public expenditure on each Returns likely to outweigh costs in spending on public goods and infrastructure, • but most expenditure is on redistribution, not public goods e.g. The 2018 Union Budget includes 11x as much funding for interest and fertilizer subsidies • than on agricultural research and extension. Value for money under the status quo is low, and the returns to simply increasing • spending along existing patterns are also likely to be low 5
1. Income transfers vs direct provision of goods and services (II) Quality of public expenditure is low • Education: Public spending per student in government schools is over 3x higher than the • total cost per-student in affordable private schools, but private schools show equal or greater student learning. (Muralidharan and Sundararaman 2015). Health: 70% of primary health care visits in rural India are to fee-charging private providers, • even when the village has a public health clinic (Das et al. 2016); ~quality at much lower cost Revealed preference: “What does it say about the quality of your product, that you can’t even • give it away for free ?” But does not warrant blanket statements of public vs. private because of • considerable heterogeneity across time, space, and providers (Romero et al 2019) Examples from PDS & ICDS: Considerable heterogeneity in preferences & valuation • Choice-based approaches can both empower beneficiaries and mitigate risk • Allocating one component of anti-poverty spending to income transfers makes it easier to • implement a choice-based architecture for service delivery over time Key idea is neither public nor private – but better accountability; thus income transfers serve • as an “index fund” for benchmarking quality of public expenditure Other design issues will remain (including information/disclosure and regulation of private • providers) – but these are needed anyway (given large private share) 6
2. Substitution versus supplementation Substitution of programs with DBT is both politically & practically risky • Implementation challenges for transfers are non-trivial • Starting in 2015, GoI tested replacing PDS with direct benefit transfers (DBT) in Chandigarh, • Puducherry, and Dadra Nagar Haveli. Our process monitoring study (Muralidharan et al. 2017) found that government records reported 99% transfers successfully made, but that 1/3 of households reported not receiving transfers In ongoing work in Jharkhand, we found 30-50% of women and AWC workers reported • exclusion from the flagship Prime Minister’s Maternity Benefits Scheme (PMMVY), compared to reports of no exclusion from senior level government officials. Cannot in good conscience recommend blanket substitution • Further, the political economy also makes it difficult to remove • More difficult to change existing spending than it is to improve the quality of new spending • (Muralidharan and Subramanian 2015) This is what we are also seeing with RBS, and PM-KISAN • Thus, relying on substitution for fiscal space (as in UBI conversations) is likely to • delay the benefits of income transfers A modest supplementary income transfer to all citizens that will allow us to get started on the • pathway towards realizing the many benefits of income transfers 7
3. Targeted versus universal income transfer programs Targeting versus universality – issues are well known • Targeting creates errors of inclusions and exclusion • Increases potential for corruption and leakage during implementation • Increases costs of determining who should be targeted, and costs to intended beneficiaries • who need to ensure they are included in the scheme Universal programs have broader political support • Main advantage of targeting of course is larger transfers for the poor • But may have greater negative impact on work incentives (phase out) • In settings of lower state capacity for targeting and implementation (like India); • the case for universality is stronger In the Indian context, PM-KISAN is a much better designed program than NYAY. • 8
4. Will people spend cash transfers badly? Common concern – but very little evidence to support it • People may spend more when they receive large windfalls (Imbens, Rubin, and • Sacerdote, 2001) People spend less or the same on temptation goods (alcohol, tobacco) when they • receive ongoing, smaller transfers (Evans & Popova 2017) People increase spending on household food expenditure, school attendance, use • of health services, dietary diversity, savings, livestock ownership, and purchase of agricultural inputs (Bastagli et al. 2016) One source of the concern is that each ministry considering a switch to DBT wants • all the money to be spent on its vertical (health, PDS, ICDS); this is unrealistic and the wrong way to think about the problem 9
5. Effect on work incentives For both developing and developed countries, there is no systematic evidence of • various cash transfer programs having a negative effect on labour supply (see Baird et al. 2017, 2018; Banerjee et al. 2019; Ghatak & Maniquet 2019; Hanna & Olken 2018; Imbert & Papp 2018; Stecklov et al. 2018; and more) In one example, an Iranian program similar to UBI faced political criticism about • disincentivizing work by the poor, but careful analysis shows that there was no evidence of reduced labour supply and if anything, the labour supply of women and self-employed men actually went up (Salehi-Isfahani and Mostafavi-Dehzooei 2018). Income effects (modest for small transfers) and substitution effects (substantial • for targeted programs that need to be phased out) This point is often misunderstood by commentators on anti-poverty programs, • but in general the empirical evidence from global settings suggests that it’s the phase-out that causes the bigger incentive problems and not the transfer 10
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